Successful Franchises: Do your homework

Things were looking great when Barbara Lockhart and her husband bought into a health care franchise two years ago.
The formula seemed solid, with lots of operational, systems and marketing support – exactly what you want in a franchise.

Things were looking great when Barbara Lockhart and her husband bought into a health care franchise two years ago.

The formula seemed solid, with lots of operational, systems and marketing support – exactly what you want in a franchise.

But thirteen months after taking it on, the Lockharts rescinded the business and walked away.

“The relationship was too one-sided,” says Lockhart.

Possible litigation means she can't delve into too many details, but she does offer some advice.

“Do your homework,” she says.

While they went down a path followed by many successful entrepreneurs – the Canadian Franchise Association reports that there are 78,000 franchised locations in multiple industries across Canada – Lockhart says the reality is that it's “buyer beware” when being a franchisee.

“It seems like a safer way of doing business, and that’s the big attraction,” says lawyer and franchise expert Steve Goldman. “However there are a lot more risks than you might be led to believe, and part of that is because you think it’s safer.”

There's the rub. A franchise isn’t necessarily a sure thing. The same rigorous research and hard work is required as any other start-up or business venture.

Goldman has a few tips to help mitigate those risks:

Give the business due diligence

“Ask a lot of questions, do some comparison shopping,” says Goldman. In Ontario the Arthur Wishart Act means a franchisor must offer full disclosure 14 days before you sign or pay any money, and while this can mean hundreds of pages of fine print and legalese, franchisees are well advised to read, and understand, it all -- and you have two years to walk away if the disclosure was inadequate.

It's also a good idea to talk to other franchisees and ask detailed questions about how they are treated -- something Lockhart advocates today as a way to get “the real story,” on a lot of issues, including what your earnings are likely to be.

Goldman agrees.

“The franchisor may be able to say it’s a successful system because everyone is paying their royalties, but you could find out the franchisees aren’t actually earning a living wage after expenses.”

Know that you get what you pay for

“It would be safer to buy into an existing, established and successful chain and a location that is already earning a profit, but you’re going to pay for that security,” says Goldman.

Go for what you know

Goldman says the Lockharts had a big problem from the start – they were new to health care. He dissuades anyone thinking of buying a franchise in an unfamiliar industry.

“Franchisors will tell you there’s training, but realistically you’re often on your own, especially in less established systems. Work in the industry for a couple of years, learn the ropes, see if you even like it,” he says.
Always negotiate

“You don’t have a lot of clout if you’re buying just one franchise in an established system, but it’s always worth negotiating terms that are too harsh or make the investment too risky,” says Goldman.

Some questions to ask:

How long is the term of franchise, and will you be able to renew on reasonable terms? Can the franchisor require expensive renovations, which will eat into your profitability? Do you have relocation rights if your lease expires before the term of your franchise? And will you have a protected territory? This factored in the Lockhart’s case, as Lockhart says “the pie was cut too small” to be successful.

A lawyer can help you spot potential issues within an agreement, and help you create a corporation to avoid personally guaranteeing the terms of any agreements.

Never fall in love

“This is what I tell my clients all the time,” says Goldman. “If you can’t negotiate terms that are acceptable to you, walk away.”

While walking away from the franchise might prove to be the best decision the Lockharts could have made, they’re not put off the idea of franchising. Barbara Lockhart herself is currently a franchisor, president of Putting Edge (www.puttingedge.com), which offers glow in the dark mini golf.

“Basically I tell people: Do your homework. Know your strengths. Understand what you’re entitled to under Wishart," she says. "Make sure you receive proper and full disclosure. Negotiate.”

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